India’s rating is same as Italy’s, but India is a much better deal: Bill Maldonado, HSBC Global

Bill Maldonado, Global CIO, equities,HSBC Global Asset Management, is not overly worried about FII outflows from India. This, he says, has much to do with profit taking and not a negative view of the country. Indian equities and fixed income look like a great deal, he asserts in an interview with Prashant Mahesh. He even predicts the end of a strong dollar phase.

Edited excerpts:

We have seen many emerging market currencies depreciate against the US dollar since the start of this year. Will the dollar strength continue?

The dollar has shown moderate strength this year. The reasons for its strength are quite well known and very much discounted by the market. The US economy is strong, interest rates are rising modestly, inflation is low and oil prices have been strong, which creates demand for dollars. We are towards the end of a strong dollar phase and it is more likely that in the next 6-12 months we have dollar stability.

There is no reason for the dollar to be weak, but if all the news is discounted by the market there are no reasons for it to appreciate unless we get some surprises — if US accelerates significantly and interest rates go up, it could be strong again, but absent those things you should see stability.

The problems in some of the markets are specific. Turkey had an unorthodox monetary policy — they have just announced return to orthodox monetary policies, which is good for the markets. In Argentina after the last government went, the economy was in a very bad shape. The current government is trying to put together a package for the economy. These are very individual and country-specific situations.

Broadly for emerging markets, currencies are undervalued against the dollar. It’s likely that the dollar should be weaker against those currencies in the coming 12 months or so.

The US economic recovery and expansion look set to continue. Are there any risks including trade policy that could threaten growth there?

Last year, the US economy did very well. It was a ‘Goldilocks’ phase as growth was strong and interest rates were low as inflation was low. This year too, the US economy is doing well. If you take a cold hard look at Trump’s policies, the direct impact on GDP is manageable even if you go for a full blown trade dispute. The impact would be a lot of less than people imagine. Trade economists feel it could be 1% of GDP. The real thing is it is impacting sentiment. Markets do not like uncertainty, which upsets them. It stops corporates from investing in new capacities, factories, new products and impacts financial markets and the real economy. By itself it will not have a direct very large impact on the economy.

Where are your investors allocating money to?

Investors are putting in money into emerging market equities especially Asia, including India, into late-cycle equity markets like Europe and Japan. In bonds, money is going into local currency emerging markets and Asian debt. Developed market government bonds, US high yield investment do not look attractive despite rising yields.

Rising oil prices have been worrying Indian investors. Is the worry justified?

The Indian rupee has been very stable and has been less volatile against the US dollar than the euro has in the last six months. Indian investors focus a lot on oil price and currency. It is important but not the only thing to focus on. In 2013-14, oil was $110 a barrel and investors did not ask me that much about oil and rupee then as they ask me now, because now people are anchored to a $30 barrel price.

Oil is finding its equilibrium at these levels. There is no fundamental reason for oil price to keep going up, there is no shortage of oil in the world, we don’t have very large demand that is driving it.

There is steady demand, but there is no big reflation in the world, no stimulus, quantitative easing or fiscal easing, so it is very likely oil prices will stabilise at these levels. Concerns from oil are overblown. I understand the legacy they are coming from, as the currency has not been strong against the US dollar, but things change.

How are valuations looking in the Indian markets?

Relative to the rest of the world and relative to other emerging markets in general, relative to Asia it doesn’t look cheap. But India never looks cheap. If you want to wait for India to be cheap to buy it you will never get an opportunity. India is neutral or expensive but never cheap. In that context, now is as good a time to buy India.

Investors are worried about issues in the banking system, but the long-term picture looks good. We have a resolution system in place and the first 12 cases are going through. The first case is resolved and that will bring capital back into the system. We have fantastic growth in financial services.

Besides that, materials is attractive — a lot of metal companies look attractive from a medium- to long-term perspective. Some sectors are cheap, and that is where we want to take advantage.

The RBI raised interest rates by 25 basis points last week. How do you look at that?

Inflation in India was above the comfort level and the RBI felt they needed to act. Is it a game changer for India? India and Italy have the same credit rating. India has a debt to GDP ratio of 70% , while Italy’s figure is 132%. India has 1.3 billion people while Italy has 60 million people. India has a younger population while Italy’s population is getting older. India has a yield of 8%, while Italy has a yield of 2%.

I would rather take the India risk, that is a much better deal. International investors are exposed to Italy because it has a 8% weightage in the world government bond index while India has a zero percentage weight. Indian GDP is growing at 7% and you want it to grow higher, while Italian GDP is peaking at 1.4%. Clearly, in the global context of equities and fixed income, India looks like a great deal.

Why are FIIs selling in India? Is politics worrying them?

The way you have seen outflows from FIIs in India this year, they are very modest and represent profit taking. India has been a consensus long for many years for all FIIs and their trimming does not represent a negative view on India. They are still overweight on India. The elections are a year away. A year is several lifetimes in politics. There is absolutely no point worrying about from an election point of view.